CHAINS AND E-PHARMACIES
This dossier is a follow-up of the "Supply Chain"
Dossier Numéro 5
PHARMACEUTICAL SUPPLY CHAIN IN FRANCE (2)
FOCUS ON PHARMACIES AND POSSIBLE BUSINESS DEVELOPMENTS
4. Focus on pharmacies and possible business developments.
4.1. The economics of the standard pharmacy, disruption patterns.
"Unusually high captive margins which focus interest of new players, various threats may dramatically change the picture with uncertain agenda"
4.2. The electronic pharmacies.
"A technological breakthrough, existing players on starting blocks; other changes in perspective"
4.3. Chains of pharmacies.
"An unavoidable move with signs of long-term plans from major external players"
4.1 The economics of the standard pharmacy, disruption patterns.
Up to 1991, the pharmacists have been regarded as a comfortable flourishing group with high revenues and little responsibilities, except regular (but rare) night or weekend guards. This financial wealth was exemplified by the very expensive price of pharmacy shops (twice the annual turnover) and by comparison with other countries. Gradually, with the occurrence of the first digressive margin, profitability has decreased even if it was compensated by gains in productivity, in transfer of margins from wholesalers and manufacturers (to secure captive clients), etc.
Although the new two-tier gross margin allows maintaining the average ratio of about 25% for reimbursable drugs in the short term, there are no doubts that the erosion of margins will resume soon.
Several factors tend to reduce operating results on average:
- the new innovative products which are all priced above 150 F per box, i.e. with a 10% margin and higher inventory costs;
- the generic emergence which decreases average margin and increases inventory costs;
- the less dynamic ethical market;
- the growth of wages and the reduction in working hours (35 per week from 2002);
- the increase in various (notably local) taxes;
- the interest rates, today at least 3 percentage points above inflation (currently 4.7% p.a.).
This situation is exemplified by the ratio of turnover, which is used in the computation of the selling price of pharmacies: this ratio has declined by 30% in the last 5 years (to reach 80% to 120%)
However, between a gross margin of 28%-35% and E.B.I.T. of 12% to 20% as roughly estimated today by experts (to be checked), there is room for manoeuvre and cost efficiency.
Globally, this unfavourable (or better flat) picture depends even more on individual pharmacies: the large dispersal in turnover is even much greater in profits (an average pharmacy is reported to produce a ROI of 8%, after tax) and small pharmacies, which are usually not members of "groupements", present low profitability and high exposure to structural changes.
Structural changes are expected within the next 2 to 3 years, once laws are (hopefully) modified:
- electronic pharmacies and e-commerce;
- no more limits for a pharmacist on the number of pharmacies he owns.
The difficulty for individualist and/or isolated pharmacists is that these changes are well known to all actors, that they depend on new legislation (slow to emerge) with a necessity of lobbying, that they require heavy initial investment and structured organisations.
Present major players in the distribution chain are better suited to face these two major changes, whoever they are: wholesalers, distributors, "groupements" and possibly, if the State opens the opportunity, pharmaceutical companies.
In favour of the pharmacists, are:
- the State, which pays attention to the continuing equilibrium of the distribution channel;
- the Unions as lobbies, and pharmacists are strongly unionised;
- the pharmacists, themselves, who may decide to enter or create groups (S.A., G.I.E. or cooperatives), without losing the majority of their capital, as a survival or a proactive reaction.
4.2 The electronic pharmacies.
The vast majority of pharmacists holds computers in their shop (97%, with 3.5 computers on average and an additional one in an office); over 70% electronically transfer the scripts ("F.S.E.") to payers mainly (50%) via the "concentrateurs" and half of the scripts are numerically codified, although electronic data need to be adjusted to the systems of the CNAMs (Sesam Vitale) and only two softwares are fully compatible and certified by the State ("C.N.D.A.") in February 2000.
The picture is however drastically opposite with regards to the Internet (October 1999):
- only 9% of pharmacists is connected for any reason;
- 17% of the connected pharmacists does surf the web for professional reasons in their office (2% frequently, 6% moderately, 9% rarely) and 3% in the shop (but rarely);
- 97%, then, does not work with the Internet;
- 5% possesses and uses a professional e-mail;
- less than 60 pharmacies claim a web site (of information).
Internet pharmacies are impossible in France, because by Law a pharmacist or his assistant in the pharmacy must deliver the prescribed drugs by hands (and technical advice with them): cases of home delivery are restricted and must be handled again by a technical assistant ("préparateur") at least. Therefore a web site, such as "drugstore.com" in the US, is not feasible. However, such a website for "pure OTC" drugs (non prescribable, non reimbursable) will be feasible, provided the necessary cash investment is available, i.e. 50 to 100 MF per year, according to experts.
Several potential candidates are suspected to prepare an entry in the foreseeable future: the already available website "Celtiph@rm" (specialised in veterinary direct e-sales).
On the other hand, if Law changes (and the President of the State C.E.P.S. believes it is possible and unavoidable) and allows ethical drugs to be directly delivered to patients, several actors may be seen as potential candidates:
- pharmaceutical companies on a national (or European) scale, especially large portfolio companies with a generic business (or not), like M.S.D. in the US;
- wholesalers on a national scale, too, since all three present big groups are today capable to deliver any drug within two hours to any pharmacist, hence to any individual;
- large "groupements", owing to their existing network of pharmacies which allows proximity and quick delivery; Giphar has already called for the coming challenge;
- individual entrepreneurial pharmacists, as a mean to develop business on a local but extended scale and also as a survival strategy;
- new players and existing indirect ones which already practice e-sales, such as "Celtiph@rm" and "Pharnet", a website dedicated to the direct orders to pharmaceutical companies, with 600 member pharmacists since its launch in September 1997, or "GlobalSanté" with 2000 pharmacists, mostly recruited via "groupements"; or diversifying players like chains of parapharmacy, or even external players which already acquired know-how of e-sales in other sectors (e.g., P.P.R., L.V.M.H.).
4.3 Chains of pharmacies.
Although they are illegal (the pharmacist must own his pharmacy and not more than two), chains of pharmacies are appealing to several actors:
- as a further step to "groupements"; for example, Pharma Référence is to announce in April its intention to create a single branded group ("enseigne") for its present "groupement" to consolidate even further; presently affiliated pharmacists will be the majority shareholders of the new "groupements", with minority shares offered to third parties; when legislation changes in "about 2 to 3 years", the "enseigne" will be transformed at once into the first pharmacy chain in France, according to its C.E.O., Lucien Bennatan, and negotiations are underway with the major insurance payer AXA, as a partner to develop exclusive options and patient home maintenance ("M.A.D."); several other "groupements" (e.g. Giphar) are also considering the issue;
- as a further step to diversification for wholesalers, because either they are owned by pharmacists, such as C.E.R.P. in part, or they are members of groups which hold chains in other countries, as Alliance-Unichem and O.C.P.-Gehe;
- as a further expansion or integration step for mutual (and private) insurers;
- as a further step to diversification for chains of hypermarkets who already offer parapharmacy, phytoproducts and cosmetics led by salaried pharmacists in closed merchandising spaces, inside hypermarkets themselves;
- as a further step to entrepreneurial pharmacists with high turnovers.
This strategic move, though, must be relativized by the other, conflicting and more modern distribution mode and diversification through the Internet, the (electronic) mail-order service.
Actualisation / Updating: Jan 15 2017